When starting a new business, founders often operate on a limited budget, and resources may be better spent on developing the startup’s products, services, and customers instead of on legal fees. While it is a good idea for a founder to consult with an attorney when forming a Washington corporation, some founders may be able to handle this process by themselves to get their startup off the ground and save their limited legal budgets for more critical areas, such as contract negotiations, employment agreements, and risk management.
If a startup founder wishes to form a Washington corporation, he or she should consider the following steps:
Prepare Articles of Incorporation. A simple form of Articles of Incorporation is available from the Washington Secretary of State. Simple Articles of Incorporation may be sufficient for many startups. However, if a startup will have more than one shareholder, raise money from outside investors, or grant stock options, the startup’s Articles of Incorporation should be more complex, and the founder should consult with a business attorney.
File the Articles of Incorporation with the Washington Secretary of State. If the startup intends to use the simple form of Articles of Incorporation available from the Washington Secretary of State, the startup should consider filing the articles online. Otherwise, a hard copy of the Articles of Incorporation, whether or not the state’s form is used, can be mailed or hand-delivered to the Secretary of State.
Prepare a Consent of the Incorporator. The incorporator is the person who signs a startup’s Articles of Incorporation. Because the startup’s initial directors typically are not named in the Articles of Incorporation (even though they can be named), the incorporator should prepare a consent that appoints the initial directors. This is important because directors are responsible for making important decisions regarding the startup.
Document Organizational Matters for the Directors. After directors are appointed by the incorporator, the directors should either have an organizational meeting with written minutes or prepare and sign a written organizational consent. The organizational meeting or consent should deal with a variety of matters, such as approving bylaws, appointing officers, and authorizing the issuance of stock.
Obtain a Federal Employer Identification Number. A federal employer identification number (“EIN”) can be applied for online through the Internal Revenue Service. A federal EIN is important for tax filings and opening bank accounts.
Consider Federal Tax Status. A corporation must file a federal tax return. The corporation can be taxed as a “C” corporation or as an “S” corporation. If the corporation wishes to elect to be taxed as an “S” corporation, it must make the election within two months and 15 days after the beginning of the tax year for which the election is to take effect. Therefore, if a startup wishes to be taxed as an “S” corporation in its first year of existence, the startup must file its “S” election within the first two months and 15 days of the startup’s existence. The “S” election is made by filing Form 2553 with the Internal Revenue Service. The founder should consult with a CPA regarding these matters.
Apply for State and Local Business Licenses. Washington requires new businesses to obtain a state business license. The application for the state business license is filed online with the Washington Business Licensing Service. Many cities and counties also require business licenses. Some of these licenses need to be filed directly with the applicable city or county. However, certain cities allow applications to be processed online with the Business Licensing Service, including Bellingham, Blaine, and Anacortes.
Open a Bank Account. Every startup should have its own bank account. It is important that the financial affairs of the startup are kept separate from the financial affairs of the startup’s founders, shareholders, directors, and officers.
Memorialize All Stock Transactions. A corporation issues stock to show who owns the corporation. The corporation should not just give stock away. Instead, it should sell the stock in exchange for something else, such as money, other assets, or services. The corporation should memorialize each issuance of stock in writing by having each shareholder (including the founder) sign a written stock subscription agreement.
If a founder is comfortable with the incorporation process, the founder can handle the process by himself or herself. However, if the founder is confused about any of the incorporation steps, or if the startup will have multiple people involved in the startup’s ownership or management, the founder should consult with a business attorney.
Bob Muraski is a business attorney based in Bellingham, Washington.